Are Parents Saving Enough for their Child's College Education?

Part of the reason for the current student debt crisis is that parents are less and less able to help their child pay for tuition. Even parents who save up money have found that college tuition has increased at a rate far past inflation. Are there solutions to this problem?

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Student loan debt is second only to housing when it comes to consumer debt. It is a growing problem here in the U.S., as students are graduating with tens if not hundreds of thousands of dollars in student loan debt. Could this have been prevented? Some indicators say no. Even with parents saving for their children’s college educations, student debt is still skyrocketing. This article explores some of the reasons why, as well as what parents can do now to better prepare for future generations.

Increased Tuition

The tuition costs for higher education have increased by 8-9% every year for generations. This means that twenty years ago, a family that budgeted about $420 a month for twenty years to save $100,000 in a college fund would find themselves short now that it has come time for their student to start college. Depending on the school, that $100,000 may not even pay for an undergraduate degree, much less a Masters or beyond. This means borrowing the difference in student loans.

The Economy

At the current rate of inflation regarding college tuition, a family starting now to build a $200,000 college fund would end up needing over $800,000 by the time their child started college. Saving $800,000 for future tuition for a child born today would mean saving more than $3,000 every month for twenty years. That amount is more than most house payments. According to Lending Tree, the average home loan in the U.S. is $222,261. On a thirty year mortgage at 4% interest, this means an average monthly house payment of $1,061. A family would have to save three times that amount every month to have enough for their child to attend school without loans.

Investment Mistakes: How to Avoid Them

Many parents don’t know about or don’t use many of the investment strategies available to them while they are building a college fund. Different plans include:

Another option parents are starting to utilize is the 529 College Savings Plan. According to J.P. Morgan Asset Management, under the 529 plan, named after the Section 529 IRS tax code, there are state-sponsored plans that encourage parents to invest for future college expenses on a tax-advantaged basis. The money invested grows deferred from taxes for the lifetime of the account; withdrawals are also not taxed when utilized to pay for qualified expenses. Additionally, A 529 plan provides gift and estate tax benefits, making funds ideal “gifts” from family members or grandparents.

It is never too late to seek the advice from a financial planner when it comes to funding your child’s college expenses. If you are late getting into the savings game, an advisor can still help guide your savings and investment planning to help avoid having to borrow the entire amount. The last thing you want to do is have money be the reason your child doesn’t get a quality education, or be able to attend the school that specializes in their field of interest because you cannot afford it. It is never too late to start investing in your child’s future and the more informed choices you make today, the more secure their future, and yours, will be.